A Convocation of Interventionists, Part 2

Summary:
Pleas for More Deficit Spending
We continue with our Jackson Hole post mortem – including remarks that were made by economists and monetary bureaucrats shortly before and after the pow-wow and seem to be connected to the discussions there.
Assembled central planners (we’re not sure if this picture was taken at the conference, but most of the people in it were there).
Photo credit: Getty Images
We should preface the following with a Mises quote, as the simple concept he remarks upon below is apparently not well understood by the people running the monetary GOSPLAN show (which doesn’t say much for them).
“[T]here is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens’ spending and investment to the full extent of its quantity.”
One would think that this should be rather obvious, but apparently it hasn’t been emphasized often enough since 1949 when the above sentence was first published. Why else would we read the following about the Jackson Hole meeting:
Central bankers in charge of the vast bulk of the world’s economy delved deep into the weeds of money markets and interest rates over a three-day conference here, and emerged with a common plea to their colleagues in the rest of government: please help.

Pleas for More Deficit Spending

We continue with our Jackson Hole post mortem – including remarks that were made by economists and monetary bureaucrats shortly before and after the pow-wow and seem to be connected to the discussions there.

Assembled central planners (we’re not sure if this picture was taken at the conference, but most of the people in it were there).

Photo credit: Getty Images

We should preface the following with a Mises quote, as the simple concept he remarks upon below is apparently not well understood by the people running the monetary GOSPLAN show (which doesn’t say much for them).

“[T]here is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens’ spending and investment to the full extent of its quantity.”

One would think that this should be rather obvious, but apparently it hasn’t been emphasized often enough since 1949 when the above sentence was first published. Why else would we read the following about the Jackson Hole meeting:

Central bankers in charge of the vast bulk of the world’s economy delved deep into the weeds of money markets and interest rates over a three-day conference here, and emerged with a common plea to their colleagues in the rest of government: please help.

After terrifying readers by reminding them that there are people “in charge of the vast bulk of the world’s economy”, the article at first mentions immigration reform (specifically considered for insular Japan with its aging population) and “structural changes to boost productivity and growth”, without providing further details. Naturally, structural reform, insofar as it reduces regulations and taxes – i.e., the opposite of what is actually happening – would be welcome.

But it didn’t take long for the debate to turn to the old stalwart of deficit spending. Similar to monetary policy, it is supposed to cause people to do things they don’t want to do, because… well, we guess because the planners know better.

In the guise of the often belabored nonsensical “jump-start” analogy we learn that a “fiscal push” may be required to produce more inflation, which is apparently unquestioningly assumed to translate into growth. It sure sounds like complete hokum in every possible way:

[Central bankers] also are hunting for ways to jolt the economy out of its doldrums, and a fiscal push is a possible tool. In a lunch address by Princeton University economist Christopher Sims, policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future.

“Fiscal expansion can replace ineffective monetary policy at the zero lower bound,” Sims said. “It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts.”

It was not clear whether such ideas will catch on. But there was a broad sense here that the other side of government may need to up its game.”

(emphasis added)

Just in case anyone finds this idea credible, we have a bridge in Brooklyn we would sell cheaply. As a reminder: since the mythical “Great Moderation” was so rudely interrupted by the “Great Financial Crisis”, global debt levels have soared by more than 60% (the last comprehensive count we are aware of is from 2014 – the figure was 57% then). Most of the increase was in government debt.

When looking at charts of this insane spending spree, one might admittedly get jolted; or “shocked into a different view of the future” if you will. We doubt that this will help the economy though. As Mises said, there is need to emphasize the truism…etc.

We later learned that Mr. Sims has a Nobel Prize in Economics, which seems to confirm our theory that the prize is a contrary indicator.

The federal mountain of red ink. It certainly hasn’t made things better so far. Enlarging it further will? – click to enlarge.

From Bad to Worse – Negative Rates and the War on Cash

As we were reading on about the Jackson Hole meeting, things went from bad to worse. Remember our warning from the beginning of Part 1 – things that may sound crazy today could easily become widely adopted practice tomorrow.

The official line is currently that the US economy is in good enough shape that the Fed feels safe in contemplating further rate hikes. Another baby step hike won’t really make a practical difference, but it may have a psychological effect on the punters in the casino (formerly known as financial market participants).

But the planners are apparently uneasy, because they are already discussing what else they might have to do if this happy state of affairs turns out to be less than permanent. And so the insane negative interest rates policy was a focus as well. According to a Bloomberg report, one especially confused academic economist took it upon himself to tackle the problem statist guns blazing. A few excerpts:

What should policy makers do if the next recession hits before central bankers climb out of their low-interest-rate fox holes? Carnegie Mellon University professor Marvin Goodfriend gamely took up that question in a paper he delivered Friday at the Federal Reserve Bank of Kansas City’s annual retreat in Jackson Hole, Wyoming, making a case for why aggressive negative interest rates might be the best answer.

[…]

Goodfriend, a former director of research at the Richmond Fed, is no fan of quantitative easing, the strategy of buying bonds when a central bank’s benchmark interest rate reaches zero. Its effectiveness in the longer-term is questionable, he said, and it steps into the domain of fiscal policy.

Negative rates, by contrast, stay firmly in the realm of monetary policy and don’t risk distorting credit markets.Making them easier to implement in the U.S. would afford the Fed more flexibility, akin to dropping the Gold Standard or a fixed exchange-rate system, he wrote.

Based on how the Fed reacted to recessions over the past 50 years, should a severe recession hit now, he says policy makers would want to push rates as low as minus 2 percent. But there’s a problem. Goodfriend points to “long-standing institutional arrangements” under which the Fed doesn’t charge for cash deposits. Retail banks are also shy about charging customers to hold their cash, in the fear they will prompt widespread mattress stuffing.

In that environment, if the Fed goes deeply into negative territory for what is likely to be an extended period, it will drive bond holders out of negative-bearing securities and into zero-interest cash, leading to what Goodfriend calls “a destructive dis-intermediation of financial markets.”

To prevent that, Goodfriend offers three ambitious options: Abolish paper currency; introduce a market-determined price for cash deposits that would rise whenever the policy rate went negative; or offer electronic currency as a substitute for paper currency on which the Fed can set a positive or negative interest rate.

Goodfriend concedes the public would probably reject option one, and option three would require “considerable investment in banking, central banking and payment system infrastructure before it could be made available.”

Option two, while it could be achieved “expeditiously,” according to Goodfriend, would also involve introducing a complex rule for determining a flexible deposit price for paper currency. As challenging as some of these obstacles might be to surmount, Goodfriend argued “removing the zero lower bound is nothing more than the sensible application of monetary economics.”

(emphasis added)

The global NIRP malady – click to enlarge.

We would dearly like to know on which planet negative rates “don’t distort credit markets”. It has to be making its rounds in a parallel universe. The fact that the man refers to the imposition of negative rates as “nothing more than the sensible application of monetary economics” is a – presumably unintended – indictment of what passes for economic science these days.

And naturally, good man Goodfriend had to warm up the idea of abolishing cash currency, a measure evidently much-pined for by monetary cranks and assorted statist charlatans. As far as we are concerned, he should consider himself unfriended for representing a clear and present danger to civilization.

Cash Opponent Kenneth Rogoff Chimes In

Kenneth Rogoff was at it again as well – not coincidentally we believe – by publishing an article entitled “The Sinister Side of Cash” in the WSJ exactly one day before the Jackson Hole meeting started. This was partly meant to promote his new book The Curse of Cash (the fact that he has written an entire book about how to take away one of the few remaining and essential freedoms of the modern financial system shows how obsessed he has become by the idea).

What strikes us as sinister is Rogoff and his fellow travelers in the execrable war on cash. The article is brimming with the usual canards (cash is only for criminals, etc.), but the main thrust soon turns out to be that he wants the central planners to be free to impose their negative rate madness to the fullest extent possible, by closing down all escape routes for savers.

If you want to enjoy a bit of financial privacy you’re practically one of these guys according to Mr. Rogoff. He more or less claims that cash is barely useful for anything else. It’s a good thing then that the civil forfeiture racket includes swiping prepaid debit cards as well by now!

Photo via thechive.com

Naturally, objections are either dismissed in passing or not mentioned at all. Rogoff does mention though that in his eyes, the government’s ability to tax everybody to death is clearly more important than anyone’s desire for financial privacy could possibly be.

Considering that he is an economist, he seems not to have given much thought to what it would mean for living standards if the so-called “shadow economy” were to actually disappear (there is no chance of that, but let’s hypothesize). Here is a prediction: even government revenues would ultimately fall precipitously if that were to happen.

Readers may want to check out an article about Rogoff’s obsession with abolishing cash we posted some time ago already: “Meet Kenneth Rogoff, Unreconstructed Statist”. It discusses many of the objections in detail Rogoff so cavalierly glosses over.

Luckily there are a few stalwart resisters in the economics profession, such as Joseph Salerno, who notes in a recent comment on Rogoff’s book:

While admitting that cash has some advantages, Rogoff makes the sensational claim that the bulk of the $1.4 trillion of US currency in circulation is used to facilitate tax evasion and to finance illegal activities like human trafficking and terrorism. Oh yes—Rogoff also argues that a cashless economy would make monetary policy more efficient by preventing savers from hoarding cash whenever central bankers—advised by sage macroeconomists like Rogoff—decide that the “natural” or optimal rate of interest for the economy has become deeply negative.

Cash is an unambiguous blessing for productive workers, savers, and entrepreneurs who wish to protect their hard earned money from the crazed theories and swindling schemes promoted by statists like Rogoff and the central bankers he advises.

(emphasis added)

Amen to that.

Stanley Fischer on Negative Rates – Blowing Asset Bubbles is Good

In the wake of the Jackson Hole meeting, Fed vice chairman Stanley Fischer gave an interview in which he touched on the topic of negative interest rates as well. He seemed just as clueless as Mr. Goodfriend – with the only consolation that he stressed that the policy is currently not considered in the US (not yet, anyway).

There are good reasons for this reluctance: the US money market fund industry is huge and plays an important role in financial intermediation. It presumably wouldn’t survive negative rates (not that the “crowding out” of private funding is considered a problem as such, see the paper on the Fed’s balance sheet mentioned in Part 1).

Fischer demonstrated his cluelessness with the following remark on negative rates:

“We’re in a world where they seem to work,” Fischer said, noting that while negative rates are “difficult to deal with” for savers, they typically “go along with quite decent equity prices.”

Let’s leave aside theoretical objections to the imposition of negative rates for the moment (we will come back to the theory aspect in a separate post). What Fischer says here isn’t even remotely true, except for the bit about savers. And even if it were true, that certainly wouldn’t make it any better.

Central banks like the ECB and BoJ assert that they have imposed negative rates to spur bank lending and price inflation. Neither objective has been met so far (luckily). They have influenced securities prices, but only insofar as they have driven the yields-to-maturity of more than $13 trillion worth of government bonds into negative territory, which is at best an accident waiting to happen. For insurance companies and pension funds it is already a catastrophe.

The best performing equity prices are found in the one major currency area in which interest rates are still positive – the US. In Europe and Japan, equity prices are certainly not much to write home about since negative rates were introduced (particularly bank stocks have nosedived relentlessly in response). Even if stock prices had moved higher, this would have only added another asset bubble to be concerned about.

In the aggregate, investors cannot get “rich” from asset bubbles. Those who get out at the top have to sell to someone else, who will then incur the losses the sellers have avoided. All buyers of stocks will make losses while the bust plays out. It is merely the distribution of these future losses that is not certain.

Meanwhile, any debts that have been incurred on the basis of inflated asset prices (let us not forget, in several countries real estate prices have soared) will remain at the same level though – and exacerbate the losses. It is a mystery to us why Fischer would think such prospects to be desirable.

We’re not sure which equity markets Stanley Fisher has looked at, but apparently not those of major currency areas with negative central bank deposit rates – click to enlarge.

Conclusion

We have read elsewhere that many of the more radical proposals by certain economists – some of which we have discussed here – didn’t meet with immediate approval, at least not by the Fed members attending the conference. Fed officials are still hoping that they will get another rate hike in before the sun sets on the latest bubble.

This should not be misconstrued to mean that extreme monetary policy activism is therefore off the table. Any or all of the proposals will remain a constant threat. Policymakers from Japan and the euro zone have affirmed their readiness to add to their already sizable interventions “if necessary” (it isn’t, but they are blissfully unaware of that and won’t easily give up). So one has to expect that all sort of things will in fact be tried out – until something breaks.

Addendum: Funding Drive

We want to extend special thanks to readers who have chipped in to support our current mid-year funding drive. Not surprisingly, we are not among the economists in line for grants from central banks. This has the considerable advantage that we can say what we want about them, which hopefully is both more entertaining and more informative than what one gets to read elsewhere. It also makes it more of a challenge to keep the site going and unfortunately we have so far failed to reach our funding goal (i.e., currently it’s a faltering funding drive). Any additional help in this respect will be greatly appreciated.

Acting Man has been named after the title of the first chapter of Ludwig von Mises' book "Human Action" - the best treatise on economics ever written. The blog's main author is Pater Tenebrarum, an independent analyst who has been involved with financial markets for 34 years and is writing economic and market analyses for independent research organizations and a European hedge fund consultancy.